As a VAT-registered business, you act as an unpaid tax collector for HM Revenue and Customs (HMRC). It is imperative that your account for all the tax revenue collected promptly and accurately. Failure to comply with the VAT regulations can result in severe financial penalties imposed by HMRC. Ignorance of the VAT rules is not an acceptable excuse for non-compliance.
To ensure you adhere to the VAT regulations, we provide guidance on the key areas that you must consider when running your business. These include, but are not limited to, registering for VAT, maintaining accurate records, charging the correct VAT rate, submitting VAT returns on time, and reclaiming VAT.
It is crucial to seek professional advice specific to your business circumstances. Our team of experts can help you navigate the complexities of VAT regulations and provide tailored guidance to ensure your business remains compliant.
WHAT IS VAT?
In order for a transaction to fall within the scope of VAT, several conditions must be met.
Firstly, the transaction must involve the supply of goods or services. Additionally, it must have taken place within the United Kingdom and have been made by a taxable person. Finally, the transaction must have been conducted in the course or furtherance of a business. It is important for businesses to carefully consider these criteria to ensure that they are in compliance with VAT regulations.
INPUTS AND OUTPUTS
In the context of business transactions, VAT is levied on both the sales of goods or services, known as outputs, as well as on the majority of goods and services purchased by the business, known as inputs. The VAT charged on outputs is collected from the customer by the business and must be remitted to HMRC in a timely manner.
On the other hand, the input VAT paid on the goods and services procured by the business can be offset against the output VAT due. It is important to note, however, that certain categories of input tax cannot be recovered, including those related to third-party UK business entertainment and most business cars.
A clothing store sells a dress for £100, and adds 20% VAT to the price, bringing the total to £120. The £20 collected in VAT is output tax.
The same clothing store purchases £500 worth of fabric from a supplier, which includes £100 of VAT. The £100 paid in VAT is input tax.
At the end of the VAT period, the clothing store calculates that it has collected £5,000 in output tax and paid £1,000 in input tax. The business would then pay HMRC £4,000, which is the net amount of VAT owed after deducting the input tax from the output tax.
It’s important to note that not all goods and services are subject to VAT, and some are exempt or have a reduced rate. Additionally, the rules around VAT can be complex and may vary based on the specific circumstances of the business, so it’s always a good idea to seek professional advice.
POINTS TO CONSIDER
In terms of VAT, taxable supplies generally fall into two categories: standard rated, which is set at a rate of 20%, and zero-rated, which is set at a rate of 0%. In addition, there is a reduced rate of 5% that applies to a limited number of specific taxable supplies.
It’s worth noting that there are also supplies that are not taxable, which are referred to as exempt supplies. It’s important to differentiate between exempt and zero-rated supplies, as there are significant implications for VAT registration and input tax recovery.
For businesses that only make exempt supplies, VAT registration is not possible, and as a result, input tax recovery is not allowed. However, if your business makes zero-rated supplies, you should register for VAT, as although your supplies are technically taxable, they are taxed at a rate of 0%, and you are allowed to recover input tax.
REGISTRATION – IS IT NECESSARY?
In order to comply with the VAT regulations, businesses must register for VAT if the value of their taxable supplies exceeds a certain annual threshold. As of 1 April 2017, this threshold has been set at £85,000. However, if your business is making taxable supplies below this limit, you may still apply for voluntary registration, which would enable you to reclaim input VAT. This could potentially result in a VAT repayment if your business is primarily making zero-rated supplies.
If you have not yet started making taxable supplies but plan to do so, you can apply for registration in advance. This would allow you to recover input tax on start-up expenses. It is important to note that once your business is registered for VAT, you must charge VAT on all taxable supplies and comply with the relevant regulations.
A person is considered a taxable person under VAT if they are making or intend to make taxable supplies and are required to be registered. This includes individuals, partnerships, companies, clubs, associations, and charities.
In the case where an individual carries on two or more businesses, all the supplies made in those businesses will be taken into account when determining whether the individual needs to register for VAT.
It is important to note that even if a business is not currently making taxable supplies but intends to do so in the future, they can still apply for VAT registration. This can be beneficial as input tax on start-up expenses can be recovered.
After being registered for VAT, it is mandatory for businesses to make a quarterly return to HMRC, which displays the amounts of output tax that need to be accounted for and the deductible input tax, along with other statistical data. All businesses are required to submit their returns online. These returns must be filed within a month of the end of the period it covers, with an additional seven calendar days provided for online forms. Moreover, electronic payment is a compulsory requirement for all businesses.
In some cases, businesses that make zero-rated supplies and receive VAT repayments may benefit from submitting monthly returns. Additionally, businesses with an expected annual taxable supply not exceeding £1,350,000 may request to join the annual accounting scheme. This scheme requires monthly or quarterly VAT payments and only one VAT return at the end of the year.
Maintaining accurate and complete records is essential for any VAT-registered business to comply with the legal requirements. It is important to keep track of all supplies, purchases, and expenses in a systematic manner.
Moreover, it is essential to maintain a VAT account, which is a summary of output tax payable and input tax recoverable by the business. This account helps in calculating the amount of VAT due to HMRC and the amount of input VAT that can be reclaimed.
It is also important to note that these records must be kept for a minimum of six years as HMRC may request to inspect them at any time during this period. Failure to maintain adequate records may result in penalties and interest charges.
INSPECTION OF RECORDS
It is the duty of the registered person to maintain accurate records and calculate the VAT liability. To ensure that the correct amount of VAT is being paid, HMRC may conduct control visits to inspect the business records periodically.
During a control visit, a VAT officer will review the business records to verify that VAT is being applied correctly and that the returns and other VAT records are accurately maintained.
It is important to note that a control visit does not necessarily imply that the business has been cleared of any discrepancies or errors, even if none are discovered during the visit.
OFFENCES AND PENALTIES
HMRC holds extensive authority to sanction businesses that neglect or misapply the VAT rules. The following violations may result in penalties:
late submission of returns/payments
errors in returns
Cash Accounting Scheme:
If a business’s annual turnover does not exceed £1,350,000, it can adopt the cash accounting scheme to calculate VAT based on payments made and received, rather than invoice dates.
Retailers may use special schemes as it is impractical for them to keep all the records required of a registered trader.
Flat Rate Scheme:
The Flat Rate Scheme is a simplified method of accounting for VAT that is available to businesses that have an annual turnover (excluding VAT) of £150,000 or less. Under this scheme, instead of accounting for VAT on the difference between the output tax (VAT charged on sales) and input tax (VAT paid on purchases), the business pays a fixed percentage of its gross turnover inclusive of VAT.
The percentage payable is determined by the type of business, and it varies depending on the industry. For example, a retail business might have a flat rate of 7.5%, while a consulting business might have a flat rate of 14.5%.
The advantage of the Flat Rate Scheme is that it simplifies VAT accounting for small businesses, as they don’t have to keep detailed records of their input tax. Instead, they pay a fixed percentage of their gross turnover inclusive of VAT to HMRC. However, businesses using this scheme cannot claim back input VAT except for certain capital expenditures over £2,000.
It’s important to note that not all businesses are eligible for the Flat Rate Scheme, and some businesses may find that they are worse off under the scheme than if they accounted for VAT in the normal way. Therefore, businesses should seek advice from a qualified accountant before deciding to use the Flat Rate Scheme.
MAKING TAX DIGITAL FOR BUSINESS: VAT
Making Tax Digital (MTD) is a government initiative in the UK aimed at making tax administration more effective, efficient and simpler for taxpayers. For VAT, MTD requires businesses with a taxable turnover above the VAT threshold (currently £85,000) to keep digital records and use MTD-compatible software to submit their VAT returns to HMRC.
MTD for VAT is intended to improve the accuracy of tax reporting and reduce errors, as well as to provide businesses with a more streamlined and digital approach to managing their tax affairs. The initiative was introduced in April 2019 and became mandatory for most VAT-registered businesses from April 2022.
As per Making Tax Digital for VAT (MTD), companies with an annual revenue exceeding the VAT threshold are required to maintain digital records for VAT and submit their VAT return data to HMRC utilizing MTD compatible software.
Businesses that voluntarily registered for VAT and fall below the VAT threshold will not be obliged to maintain digital records or provide quarterly updates, but they may choose to participate in the program.
Certain MTD VAT exemptions exist, but they are narrowly defined and are not likely to apply to most VAT-registered businesses.
HOW WE CAN HELP
We offer various services to help ensure your business complies with VAT regulations. We can help by customizing your accounting systems to accurately and efficiently handle VAT information, ensuring that your business is VAT efficient and has sufficient funds to meet VAT liabilities on time.
Our services include assisting with VAT return completion, negotiating with HMRC in case of disputes and reaching settlements, and advising on whether any available schemes are suitable for your business.
We can also help your business comply with Making Tax Digital for VAT.
If you have started or are planning to start a business and require assistance with VAT-related matters, please do not hesitate to contact us.